ARCHIVED -  Telecom Order CRTC 99-1233

Telecom Order CRTC 99-1233

Ottawa, 23 December 1999

Bell Canada withdrawal from Partial System Offering and introduction of an option to purchase leased plant

File Nos.: Tariff Notice 5928 and 96-2184

The CRTC approves the withdrawal and destandardization of the Partial System Offering (PSO), a service whereby Bell Canada leases distribution plant to cable companies. In addition, the cable companies that currently use this service will have the option to purchase this plant.

Many cable companies in Ontario and Quebec lease plant consisting mainly of cabling attached to Bell's support structures in order to transport their distribution signals.

On 18 December 1996, the Canadian Cable Television Association requested that the Commission require Bell to offer its PSO clients the option to purchase this PSO plant.

In January 1997, Bell agreed to this request and at the same time, proposed to withdraw from the provision of the PSO. Until withdrawal takes place, Bell proposed not to accept any requests for extensions to existing systems or applications for new systems. In doing so, the telephone company would destandardize the provision of the PSO.

The Commission approves the destandardization as well as the withdrawal of Bell's PSO. The withdrawal will generally take place three years from the date of this order.

Exceptions will be made in cases where, at such time, the initial 10-year lease terms of PSO agreements have not expired.

This order provides details of the terms and conditions for the withdrawal and destandardization of the PSO. It also includes the Commission's preliminary view on the terms and conditions of the option to purchase Bell Canada's PSO plant.

Background

1. In a letter dated 18 December 1996, the Canadian Cable Television Association (CCTA) filed a Part VII application requesting, based on sections 24, 32(g) and 42(1) of the Telecommunications Act (the Act), that the Commission provide cable licensees using Bell Canada's (Bell's) Partial System Offering, or PSO, with the option to purchase the PSO plant that they are leasing. The CCTA argued that, in the absence of this relief, Bell will be in a position to gain a competitive advantage over cable licensees in both the broadcasting and telecommunications markets.

2. In its answer to the CCTA's Part VII application, Bell agreed to offer its PSO clients an option to purchase its PSO plant. Bell also proposed to destandardize and to withdraw from the provision of the PSO, in accordance with the proposed tariff revisions under Tariff Notice 5928.

3. Subsequently, the Commission determined that both applications would be addressed in the same proceeding.

4. In addition to Bell and the CCTA, comments were received from Norcom Telecommunications Limited (Norcom), Hastings Cable Vision Limited (Hastings), Rogers Cablesystems Limited (Rogers), Shaw Communications (Shaw), Sorel-O-Vision and Western Co-Axial Limited (Western).

Bell's proposal to destandardize PSO

5. Bell proposed to destandardize the provision of the PSO, that is, it would no longer provide extensions to existing systems or accept applications for new systems. However, it would continue to provide the PSO to existing clients for three years, including the repair and maintenance of partial systems.

6. While the CCTA initially opposed destandardization, it later supported Bell's proposal, acknowledging that cable companies have not submitted applications for new systems in the recent past, and that the declining demand for PSOs can be expected to continue.

7. In light of the above, the Commission approves PSO destandardization, effective the date of this determination. Bell is directed to file, for Commission approval, proposed revisions to its General Tariff Item 4910 within 60 days of the date of this determination.

Bell's proposal to withdraw PSO

8. Bell also proposed to extend all existing PSO agreements for three years from the date of this determination, unless terminated at an earlier date by the PSO client.

9. Bell submitted that PSO withdrawal should be allowed, in large part, based on its view that the markets for cabling and its installation and maintenance are now competitive. In Bell's view, it would be inappropriate to continue imposing a requirement that it operate as a supplier of last resort of support structures and transmission facilities.

10. The CCTA submitted that PSO agreements should be allowed to continue for the full life of the PSO plant or until a cable licensee terminates use or exercises an option to purchase (OTP) the plant. Some parties argued that Bell's proposed withdrawal date was arbitrary and that they entered into PSO agreements on the understanding that they could use the PSO facilities for the full life of the plant.

11. With respect to the arguments to the effect that PSO lessees expect to use the PSO plant until the end of its useful life, the Commission notes that PSO agreements provide that, after the initial 10-year lease term, either Bell or the lessee can terminate the agreement.

12. Based on the evidence presented, the Commission agrees that the markets for cabling are competitive, and thus considers PSO withdrawal to be appropriate.

13. With the exception discussed below, the Commission approves PSO withdrawal three years from the date of this determination. However, in light of the timeframe involved, the withdrawal is conditional upon the current PSO clients obtaining all necessary rights-of-way to ensure the transition from PSO to Support Structure Offering (SSO)other support structure arrangements. Under the SSO, cable companies can obtain access to Bell's support structures for their own cables. In order to minimize the potential for PSO clients to delay withdrawal by unreasonably prolonging the obtention of rights-of-way, the Commission notes that Bell may bring any concerns regarding unreasonable delays before the Commission.

14. The PSO withdrawal deadline approved above does not apply to PSO clients who have not completed the initial 10-year lease term of their respective PSO agreements. The Commission will allow such PSO agreements to remain in effect for the full duration of the initial 10-year term, should PSO clients wish to complete their initial term. In cases where the initial 10-year term expires before the three-year withdrawal date, PSO agreements will be terminated three years from the date of this order. Alternatively, when the initial 10-year term expires after the three-year withdrawal date, PSO will be withdrawn at the termination of the relevant initial 10-year agreement. Such clients are expected to have finalized alternate support structure and cabling arrangements by their respective withdrawal dates. With respect to the concerns expressed by some cable companies, the Commission considers that this withdrawal process will not cause undue financial or operational hardship.

15. The Commission directs Bell to file, for approval, proposed revisions to its General Tariff Item 4910, reflecting the Commission's changes described above, within 60 days of the date of this determination.

16. The Commission rejects the CCTA's proposal that withdrawal be conducted on a section-by-section basis, once sections have been fully paid for from a capital recovery perspective. The Commission notes that, with the exception of PSO clients that have not completed their initial 10-year lease term, allowing section-by-section withdrawal would be inconsistent with its determination to mandate conditional withdrawal three years from the date of this determination. Furthermore, so doing would be likely to cause administrative and operational difficulties.

17. The Commission notes that in some cases, under an SSO agreement, a cable company uses conduit that is routed through a Bell Central Office (CO). In those circumstances, under the SSO, Bell requires the cable companies to use Bell's cable, which is provided on a PSO basis. Given Bell's proposal to destandardize PSO, Bell proposed to grandfather the existing arrangements but not to allow new arrangements or additions to such existing arrangements in the future. For additional or replacement facilities, Bell proposed that PSO clients that migrate to SSO obtain facilities outside the COs where available or otherwise bypass COs. The Commission approves Bell's proposal and requires that it file a revised tariff reflecting the proposed grandfathering within 60 days of the date of this determination. This will ensure that current clients which use Bell-provided cable for the portion of the conduit that runs through a CO will continue to have access to this cabling at current PSO rates.

18. Finally, Norcom expressed concern with respect to the possibility of being denied access to Bell's support structures in the event that it opts not to purchase Bell's cable. In Access to telephone company support structures, Telecom Decision CRTC 95-13 dated 22 June 1995 (Decision 95-13), the Commission indicated that it finds it reasonable that the telephone companies be required to provide access to their support structures where spare capacity is available. The Commission added that, should it prove necessary, it would adjudicate disputes with respect to the availability of spare capacity on a case-by-case basis. In the Commission's view, a case-by-case approach remains appropriate, as the resolution of such disputes is a function of the particulars of the case at hand. Thus, should such issues arise, and the parties involved be unable to come to an arrangement, cable licensees can bring their concerns to the Commission for resolution.

Option to purchase Bell's PSO plant

19. As indicated above, the CCTA filed an application requesting that the Commission direct Bell to grant its PSO clients the option to purchase, on reasonable terms, the PSO cable facilities that they lease from Bell. In response, Bell agreed to offer an option to purchase its PSO plant. However, the parties disagreed on some of the terms and conditions of the OTP.

Degree of Commission involvement

20. The Commission notes that the sale of Bell's PSO plant by a Canadian carrier constitutes the provision of a telecommunications service, and thus, the Commission considers it appropriate that it oversees the terms and conditions of the OTP agreement.

21. In light of the above, the Commission provides, in the remainder of this determination, its preliminary view on the terms and conditions of the OTP which it considers to be reasonable. The Commission requires Bell to file a draft OTP agreement for Commission approval by 7 February 2000, serving copies on the CCTA and all current PSO clients. In turn, the CCTA and PSO clients may file comment on the terms and conditions of the OTP agreement by 23 March 2000, serving a copy of their comments on Bell. PSO clients are also required to serve a copy of their comments on the CCTA. As Bell filed with the Commission the list of its PSO customers in confidence, Bell will be expected to serve on its PSO customers all comments filed by the CCTA and other PSO clients. Finally, Bell will be given until 25 April 2000 to reply to the comments filed, serving copies on the CCTA and PSO clients.

Pricing the OTP

22. The Commission first notes that PSO agreements are leases and that there are no provisions allowing for the acquisition of ownership rights. Thus, lessees can neither assume that their lease will continue beyond their lease terms, nor can they assume that their monthly rental charges are payments toward the ownership of assets.

23. In the Commission's preliminary view, net book value (NBV) pricing is the appropriate approach to apply to the plant under consideration. The value would thus consist of the capitalized portion of the total installed costs, less accumulated depreciation. In this case, the Commission understands that the cable companies paid for approximately 80% of these plant costs up front, while approximately 20% of the costs were capitalized on Bell's books.

24. The Commission's preliminary view is that PSO clients who exercise the OTP should compensate Bell for administrative expenses of a similar nature to those described in the 1980 OTP agreement, assuming that such expenses are reasonable and itemized for the client. In the 1980 OTP agreement, administrative costs included:

- adjustments to the NBV to take into account any replacement or cancellation of the facilities or additions or extensions thereto and the effect of depreciation.

The Commission is also of the preliminary view that the cost of determining the NBV along with legal expenses incurred in the preparation and execution of the bill of sale should be borne by the PSO clients. Again, such expenses are to be reasonable and itemized for the client.

25. With respect to the issue of PSO plant inventories, the Commission first notes that the focus is on the valuation of the plant that Bell installed for the benefit of PSO clients. In cases where cable licensees have removed portions of the PSO plant without authorization, it is reasonable to expect them to pay the NBV of the installed plant, including any parts that have been removed without authorization.

26. As to the CCTA's claim that the PSO tariff incorporates the SSO rate which is designed to recover the cost of record keeping, the Commission notes that, no changes have been made to the PSO tariff to incorporate the Support Structure Offering (SSO) rates approved in Decision 95-13. Accordingly while PSO tariffs have been linked to SSO tariffs, the linkage was not directly maintained in the current PSO tariffs. at or following the issuance of Decision 95-13

27. In the Commission's preliminary view, PSO clients who opt to exercise the OTP should bear the expenses related to pre-sale inventory performance. The Commission considers that inventory performance is required prior to the sale of assets to confirm the value and existence of such assets. Related expenses should not be borne by Bell, as it would not have to incur such expenses if it remained the owner of the assets. However, these expenses are to be reasonable and itemized for the client.

28. The Commission notes that Bell's 1980 OTP agreement provided for two payment options: i) full payment of NBV at the time of the transfer of the title; or ii) payment of 20% of the adjusted NBV at the time of the transfer of title and the remainder to be paid in four equal instalments on the ensuing four anniversary dates of the transfer together with interest on the paid balance at the current prime bank rates. The Commission is of the preliminary view that such options should be offered to PSO clients in the OTP agreement under consideration.

OTP timeframe

29. It is the Commission's preliminary view that the OTP development and implementation process should span three years and include the following phases:

(a) Commission approval of OTP agreement;

(b) Bell provision of OTP terms to PSO clients, allowing time for clients to consider whether they wish to exercise the OTP as detailed by Bell; and

(c) implementation of OTP agreements and completion of the transfer of the title.

30. The Commission notes that, given the availability of the Commission's preliminary view on the OTP terms, PSO clients and Bell alike will be in a position to start conducting much of the business detailed in the second phase of the OTP process in parallel with the OTP agreement approval process.

Safety and technical requirements

31. It is the Commission's preliminary view that any deviations from the safety and technical requirements of the SSO agreement existing at the time of the transfer either be rectified at Bell's expense or be grandfathered on a case-by-case basis. The facilities would be transferred on an "as is" basis, with no further obligation on Bell's part to maintain or update the facilities. For cable installed by Bell, the buyer would not be responsible for safety and technical deficiencies that had been grandfathered at the time of the transfer. However, a licensee would be required to replace plant if it fails to meet Bell's SSO safety and technical requirements, if such deficiency had not been grandfathered.

Abandonment or removal fees

32. The Commission notes that, under the SSO tariff, licensees are responsible to install, maintain, rearrange, replace, repair, remove or transfer their facilities or perform any other work to meet Bell's requirements at their own expense. Consequently, should a PSO client enter into an SSO arrangement, it would have to incur the expense associated with the removal of its cable once its useful life is over.

System-by-system OTP

33. CCTA requested that its member companies be provided with the OTP segments of PSO plant on a system-by-system basis to ensure that a transition to SSO takes place in an orderly and financially reasonable fashion. In the Commission's preliminary view, cable companies should be provided with the opportunity to purchase the PSO plant on a system-by-system basis.

Secretary General

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